When Satya Nadella became Microsoft‘s (MSFT -0.74%) third CEO in 2014, he vowed to transform the aging tech giant into a “mobile first, cloud first” company. That bold strategy boosted the company’s annual revenue at a compound annual growth rate (CAGR) of 10% from fiscal 2014 to fiscal 2023 (which ended last June) as its earnings per share (EPS) grew at a CAGR of 16%. It also repurchased nearly 10% of its shares over the past 10 years.

During that golden decade, Microsoft’s stock rallied nearly 890%, which turned it into the world’s second-most-valuable company with a market capitalization of $3.3 trillion. A lot of that growth has been driven by Azure, which expanded into one of the three dominant leaders of the booming cloud computing market.

Below is a fresh look at Azure, how fast it’s growing, and why it will likely remain Microsoft’s most important business for the foreseeable future.

Image source: Getty Images.

A brief history of Azure

Microsoft launched Azure in 2008 to provide cloud-based infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) tools to large companies. Instead of installing more on-site servers — which are expensive, consume lots of power, take up valuable space, and require constant maintenance — companies could simply rent that computing and storage power from Azure as usage-based or subscription-based services.

Satya Nadella previously led Microsoft’s cloud and enterprise group before becoming its CEO, so he recognized the growth potential of Azure’s cloud platform. But when he took the helm, Azure was still a lot smaller than Amazon Web Services (AWS), which had already established a first-mover’s advantage in the market.

To narrow that gap, Microsoft aggressively invested in Azure — even though that strategy temporarily squeezed its operating margins. It expanded its ecosystem with more tools, locked in big retailers like Walmart and Target (which directly competed against Amazon), and invested in OpenAI to integrate the start-up’s generative artificial intelligence (AI) tools into its own cloud services.

Azure’s expansion supported Microsoft’s transformation of its desktop-based Office and Dynamics applications into cloud-based software-as-a-service (SaaS) applications. That shift drove the company to launch mobile versions of its flagship applications for iOS and Android devices, tether its Windows OS to more cloud-based services, and launch cloud-based gaming platforms for its Xbox consoles.

Azure’s market-share gains

Back in 2015, Microsoft set an ambitious goal of growing its annual cloud revenue from $6.3 billion to $20 billion by fiscal 2018. It surpassed that target ahead of schedule in fiscal 2017, and that figure soared to $110 billion (52% of its total revenue) in fiscal 2023. More than half of its total cloud revenue came from Azure during that year.

According to Synergy Research, Azure’s share of the global cloud infrastructure market grew from 14% to 26% between the fourth quarters of calendar 2017 and 2023. During that same period, AWS’ share dipped from 32% to 31%, while Alphabet‘s Google Cloud grew its share from 8% to 10%.

Those figures suggest that Azure and Google Cloud might be chipping away at AWS’ dominant market share, but they’re also pulling a lot of business away from smaller competitors that lack the scale to keep pace with the three cloud leaders.

How fast is Azure growing?

Microsoft doesn’t disclose its exact revenue or operating-income figures for Azure’s cloud infrastructure business. Instead, it only reports the year-over-year growth rate of its “Azure and other cloud services” segment on a quarterly basis.

This segment grew at more than 60% throughout most of fiscal 2020 but cooled off to the high-20s and low-30s over the past year. That slowdown wasn’t surprising, since the macro headwinds drove many companies to rein in their cloud spending, but Azure’s revenue growth actually accelerated over the past three quarters.

Data source: Microsoft. Chart by author.

That acceleration can be attributed to bigger AI workloads — which are driving more companies to scale up their cloud infrastructure services — and the integration of OpenAI’s popular generative AI tools into its own cloud-based services.

Can Microsoft maintain its momentum?

Analysts expect Microsoft’s revenue and EPS to grow at a CAGR of 15% and 17%, respectively, from fiscal 2023 to fiscal 2026. Its stock isn’t cheap at 33 times next year’s earnings, but its scale and diversification justify that higher valuation. It’s still an easy to stock to recommend for anyone who wants more exposure to the growing cloud, AI, and gaming markets.